Accounting 1A&B Reviewer – Prepared by Marc Angelo S.

Sanchez
CHAPTER 1 – INTRODUCTION TO ACCOUNTING
Partnerships are governed by the CIVIL CODE OF THE
BUSINESS/ ENTERPRISE/ FIRM – an organization engaged in the PHILIPPINES
trade of goods, services or both to consumers
ADVANTAGES
PROFIT-ORIENTED TYPE OF BUSINESSES - Generally, - Easier to organize compared to a corporation
businesses are administered to earn profit to increase the wealth - Burden is shared
of owners - More ideas are exchanged, better decision-making

NON-PROFIT ORIENTED DISADVANTAGES

- May result to disagreement
NON-PROFIT ORGANIZATIONS – an organization that uses - Life of partnership is fragile
surplus revenues to achieve its goals rather than to distribute - Unlimited personal liability for partnership debts
them as profit or dividends
CORPORATION – most complex form of business organization.
- While non-profit organizations are permitted to Corporation code defines a corporation as an artificial being
generate surplus revenues, they must be retained by the created by law. They can sue and be sued
organization for its self-preservation, expansion or
plans STOCKHOLDER – a person who invests and becomes an owner
- Examples: Charitable/ Educational Institutions of the corporation

FORMS OF BUSINESS ENTERPRISES For every share purchased, a stockholder is issued a certificate of
stock
- A business enterprise may be classified according to the
nature of their business as either a SERVICE, ADVANTAGES
MERCHANDISING, OR MANUFACTURING business - Has the greatest capacity to raise capital
- Stockholders may transfer their shares
SERVICE BUSINESS – offers services and typically generate a - Limited liability of owners
profit by charging a fee; SIMPLEST among the three
DISADVANTAGES
MERCHANDISING BUSINESS OR TRADING CONCERN – buys - Cost of forming and managing is relatively high
goods and sells them without any alteration made on their state - Subject to greater scrutiny, regulation, control and
or condition supervision by the government
- Has limited powers
MANUFACTURING BUSINESS – buys goods called raw - Higher income tax rate
materials, then converts them into finished products; MOST
COMPLEX because of the conversion of the raw materials into ECONOMIC DECISIONS
finished goods; MATERIALITY, LABOR, OVERHEAD - One important assumption in decision making is the
existence of reliable information
LEGAL FORMS - Significant number of this comes from accounting
information
SOLE PROPRIETORSHIP – one owner; can operate on his own or - Making right decisions requires great skill, timing, sound
employ others as business operations expand; most basic legal professional judgment, and the use of reliable financial
form of business information

ADVANTAGES FINANCIAL INFORMATION

- Easiest to form - Decision making process requires financial and non-
- Less complex business transactions financial information as well
- Minimal regulatory requirements
- Decisions implemented faster Financial Information – summary of all the transactions of the
- Proprietor enjoys all profits business over a period of time

DISADVANTAGES - Transactions of the business are recorded by

- Limited ability to raise capital bookkeepers or accountants
- No second opinion
- Proprietor bears the risks and losses of the enterprise Accounting – may be viewed as a service function to
- Unlimited personal liability management; basically processes raw data and converts them
into meaningful information that will be useful for decision-
PARTNERSHIP – an association of two or more persons, the making
partners, who bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the ACCOUNTING DEFINED
profits among themselves
Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.
Accounting 1A&B Reviewer – Prepared by Marc Angelo S. Sanchez
Committee on Accounting Terminology of the American - Supervision, control, and regulation of the practice of
Institute of Certified Public Accountants – Accounting is the art accountancy in the Philippines
of recording, classifying and summarizing in a significant manner,
and in terms of money, transactions, and events which are in part Article II of RA 9298 – creates the Professional Regulatory
at least of a financial character and interpreting the results Board of Accountancy
thereof
PRBA – agency tasked to enforce the provisions of the Philippine
American Accounting Association – Accounting is the process of Accountancy Act; also granted the right to issue, suspend, revoke
identifying, measuring and communication economic information or reinstate CPA certificated for the practice of the profession
to permit informed judgment and decision by users of the
information - Composed of a chairman and six members, all of whom
are appointed by the President of the Republic of the
Accounting Standards Council – Accounting is a service activity. Philippines
Its Function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be THE CPA BOARD EXAMS
useful in making economic decisions Requisites for any person applying for examination
- Filipino citizen
BASIC PURPOSE OF ACCOUNTING - Good moral character
- Supply financial information to users to help them make - Holder of the degree of Bachelor of Science in
informed judgments and better decisions Accountancy conferred by a school, college, academy
or institute duly recognized and/or accredited by the
ACCOUNTING – THE LANGUAGE OF BUSINESS CHED or other authorized government offices
- Has not been convicted of any criminal offense involving
Language – is a means for communication ideas, thoughts, and moral turpitude
information to others
Subjects, but not limited to:
Accounting is the language used to communicate financial - Management Services
information to interested parties; through accounting, different - Business Law and Taxation
users of financial information understand what is happening in the - Theory of Accounts
business enterprise - Auditing Theory
- Auditing Problems
ACCOUNTING AND BOOKKEEPING DISTINGUISHED - Practical Accounting Problems I
- Practical Accounting Problems II
Bookkeeping is the procedural or mechanical aspect of
accounting; involves the set-up, update and maintenance of 75% - general average, with no subject lower than 65%
accounting records
Conditional credit – must retake subjects lower than 65% and
Accounting – conceptual and goes beyond bookkeeping; should pass it
includes interpretation of information recorded under
bookkeeping After 2 failed attempts in the boards, candidates should enroll
24 units of the subjects again
THE ACCOUNTANCY PROFESSION
The profession is relatively new; accounting is a profession SECTORS OF ACCOUNTING PRACTICE
because it has the attributes required of a profession:
PUBLIC PRACTICE – includes individual practitioners, small
1. Mastery of a particular intellectual skill, acquired by training accounting firms, medium sized and multinational accounting firms
and education that render independent professional accounting services to the
2. Adherence by its members to a common code of values and public; CPAs charge professional fees
conduct established by its administrating body, including
maintaining an outlook which is essentially objective Examples of services by CPAs
- Auditing – the most common service being provided by
3. Acceptance of a duty to society as a whole (usually in return CPAs; involves the independent examination of financial
for restrictions in use of a title or in the granting of a statements for the purpose of expressing an opinion on
qualification) the fairness of these statements
- Tax services – this includes the preparation of tax
THE PHILIPPINE ACCOUNTANCY ACT OF 2004 returns for various clients, provision of advice on tax
matters, and representation of clients in tax cases
This profession is governed by law; R.A. NO. 9298 – was signed - Management consulting services – involves providing/
into law with the following objectives: consulting services to clients on matters of accounting,
- Standardization and regulation of accounting education finance, business policies, organization procedures,
- Examination for registration of certified public budgeting, product costing and the conduct of
accountants operations
Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.
Accounting 1A&B Reviewer – Prepared by Marc Angelo S. Sanchez
COMMERCE AND INDUSTRY – Accountants in commerce and MANAGEMENT ACCOUNTING – is concerned primarily with
industry assist management in planning and controlling a financial reporting for internal users, such as management. These
company’s operations users have control over the accounting system and can specify
precisely the type of reports needed for use in decision-making
Comptroller – highest accounting officer in a business
organization COST ACCOUNTING – measures a business’s costs to help
management in controlling expenses. Cost accounting records
EDUCATION – employs accountants as professors, reviewers or guide managers in setting prices for their products and services
researchers; they take steps to clarify ad address emerging to achieve greater profits
accounting issues encountered by accountants in other sectors
TAX ACCOUNTING – has two aims: compliance with the tax
GOVERNMENT – may be hired as staff, auditor, budget officer, laws and minimizing the company’s tax bill through legal means.
or consultant in government units like CoA, BIR, DF, DBM, and SEC Accountants provide tax planning and tax consultancy services,
such as giving advice to clients on what type of investments to
BRIEF HISTORY OF ACCOUNTING make and on how to structure business transactions

Accounting traces its roots to the Middle East region, where as GOVERNMENT ACCOUNTING – encompasses the process of
early as 850BC, tradesmen use clay objects to represent analyzing, classifying, summarizing, and communicating all
commodities such as flocks of sheep, jars of spices and oil, bolts transactions involving the receipt and disposition of government
of clothing and other goods funds and property and interpreting the results thereof. In other
words, the focus of government accounting is the proper custody,
The ancient civilizations of Babylon, Greece and Egypt also used disposition and accounting for public funds
clay tablets (in later years, papyri were used as the medium for
record-keeping) ACCOUNTING AND INFORMATION TECHNOLOGY

13th to 15th centuries – growth of trade, more systematic record- The advent of IT revolutionized accounting and gave it a big
keeping methods were developed; FLORENTINE, VENETIAN and boost in terms of efficiency and timeliness. Accounting procedures
GENOAN merchants used these methods to keep trac of their can now be performed with speed and accuracy by computers.
business. DOUBLE ENTRY RECORDS first appeared in Genoa in They can never replace the professional judgment of an
1340AD accountant

LUCA PACIOLI AND THE SUMMA Accounting s a dynamic profession

1494 – Friar Luca Pacioli wrote a book which contains discussions

on the double-entry bookkeeping entitled SUMMA DE
ARITHMETICA GEOMETRIA, PROPORTIONI ET
PROPORTIONALITA (Everything about Arithmetic, Geometry,
Proportions and Proportionality. This is a summary of the existing
mathematical knowledge at that time. He was considered the
FATHER OF DOUBLE-ENTRY BOOKKEEPING because of this.

THE INDUSTRIAL REVOLUTION

Mid 18th to mid 19th century – from craftsmen method to
assembly-line method; OVERHEAD COSTS became problematic.
To solve this, cost accounting was developed.

COST ACCOUNTING – specialized field of accounting which

deals with the allocation of costs to products

The corporate form of business organization was created to

accommodate the need for increasingly large amounts of funds
which are required to finance the expansion of business during
this period

Owners, managers, financial statements

FIELDS OF ACCOUNTING

FINANCIAL ACCOUNTING – focuses on the preparation and

presentation of general-purpose financial statements with the aim
of meeting most of the needs of external users
Reference: Beticon, J.L., Garcia, E.R., Hinayon, M.J., Ireneo, S.C., & James, G.R. (2013). Fundamentals of Accounting.
Philippines: n.p.